In the pub after work, many contractors鈥� staff would favour the second explanation. Dark mutterings about building materials cartels that keep prices high and squeeze undercutters out of the market have long been a feature of the construction industry. But the government says it wants to take these suspicions out of the pub and into the open 鈥� and its weapon is the forthcoming Competition Act.
The act, due to be legally enforced on 1 March 2000, is modelled on tough European Union competition law and has the penalties and investigative powers to match. Last month, trade and industry secretary Stephen Byers announced that a beefed-up Office of Fair Trading would be able to fine any company found engaging in anti-competitive practices up to 10% of UK turnover, backdated for two years if the breach was longstanding.
As an OFT spokesman explains, there will be a world of difference between the OFT鈥檚 powers under current legislation and the new regime: 鈥淚f a whistle-blower gave us information today that a firm is in a cartel, we would have to write to them and say 鈥榩lease give us details鈥�. We could take them to court for an order that basically asks them not to do it again. But next year, we can go to premises to demand information and go through files, then impose a penalty of 10% of turnover 鈥� a huge disincentive.鈥�
The act prohibits 鈥渁greements between undertakings 鈥� which prevent, restrict, or distort competition鈥�, including dividing up a market geographically, or agreeing to tender in rotation. It also outlaws 鈥渁buse by one or more undertakings 鈥� of a dominant position in a market鈥�, where 鈥渄ominant鈥� is interpreted by the OFT as a single firm with control of more than 40% of the market.
This threshold affects a number of building materials companies that have consolidated their way to comfortable market positions. Blue Circle holds about half the UK鈥檚 cement market, and BPB 鈥� currently part of a European Commission investigation into alleged plasterboard price-fixing 鈥� has more than half of the UK鈥檚 plasterboard and plaster sales. Stanton, a subsidiary of French conglomerate Saint-Gobain, has 75% of the UK鈥檚 cast iron drainage market.
鈥淭he building materials producers will inevitably come under the spotlight once again,鈥� comments one City analyst, who preferred not to be named as his employer advises several materials producers. The OFT agrees that building materials has a history of price-fixing and similar practices, and is therefore likely to feature in future investigations. "It鈥檚 an industry with little research and development, and one supplier鈥檚 product is very similar to another鈥檚. It鈥檚 easy in these circumstances for people to get together and say 鈥榣et鈥檚 not bother competing鈥�,鈥� says the spokesman.
With an extra 50 staff, the OFT will be tracking markets for evidence of price-fixing, such as simultaneous price increases. But it will also be relying on whistle-blowers and complaints from the industry at large 鈥� which is where the dark mutterings in the pub come in. As the analyst notes, it is contractors鈥� staff on the ground who are most likely to come across evidence of cartels or price-fixing, and that fixing is less likely to be a carve-up organised by chief executives in smoke-filled rooms as an ad hoc deal between regional managers under pressure.
Two other analysts believe that the act will herald a wave of training and re-education for companies鈥� sales staff. 鈥淭he act will deter anyone who thought they could get away with it,鈥� says Alastair Stewart of investment bank Robert Fleming. 鈥淲e鈥檒l see building materials companies putting in much more serious monitoring.鈥�
Mike Betts, building analyst at JP Morgan, believes that this tougher regulatory climate will lead to pricing being controlled from the head office, and that e-mail could be used extensively to update price lists.
鈥淵ou can determine the price, then give salespeople a margin for manoeuvre,鈥� says Betts. 鈥淭he group will want to make decisions as a whole to get a decent shareholder return.鈥�
The building materials producers will inevitably come under the spotlight once again
City Analyst
Concrete supplier RMC has had several run-ins with the OFT in the past. In 1995, for example, three directors were fined a total of 拢57 000 for restrictive practices 鈥� and six subsidiaries are currently under investigation by Germany鈥檚 federal cartel office over allegations of carving up part of the Berlin concrete market.
RMC spokesman Tim Stokes says that the company has set up a Competition Act working party, and is now engaged in comprehensive staff training. 鈥淚t鈥檚 a complex area 鈥� people new to the group might not be aware that the most innocent comments can be seen as against the spirit of the act.鈥�
But although a new monitoring system will be introduced, Stokes says that RMC 鈥渄oesn鈥檛 want to get enmeshed in recording the details of all quotes 鈥� it would act as a massive barrier to doing almost anything鈥�.
With 330 ready-mix plants across the country serving localised markets, each with different aggregate suppliers and different cost bases, RMC says it believes it would be unfair to tie its sales managers to central price lists. As for IT bringing greater pricing consistency, Stokes says: 鈥淚t has potential, but as an industry we鈥檙e a long way from e-commerce.鈥�
BPB has also 鈥渟tepped up its training programme over the last year鈥� in anticipation of the act, according to company secretary Bob Heard. But in Heard鈥檚 opinion, the problem with competition law is that breaking it can be a question of perception. 鈥淲e try to make all our staff aware of the provisions and pitfalls of the law, and tell them that it鈥檚 not just what you do but how it looks,鈥� says Heard. 鈥淪omething that looks innocuous may not be, and vice versa.鈥�
BPB has a dominant position in several European markets, but Heard emphasises that "having a 40% share is not an abuse 鈥� it just means that you are potentially a company that could abuse its position鈥�.
But at the European Commission鈥檚 competition directorate in Brussels, spokesman Stefan Rating would rather see more firms in the market than fewer, and is concerned about the current wave of acquisition and consolidation. "Increasing consolidation is a worrying scenario. If the number of companies is reduced, it improves the climate for cartels. Running a cartel isn鈥檛 dying out,鈥� he warns.
As far as the UK is concerned, most commentators believe that anti-competitive practices are on their way out 鈥� and that the Competition Act will be the kiss of death.
鈥淚 don鈥檛 think price-fixing has a future; there are just too many downsides,鈥� says Betts.
And if a few recalcitrant area managers have not heard the message that it鈥檚 time to clean up their act, they could find themselves rumbled by the newly empowered conspiracy theorists from the pub.
I don鈥檛 think price-fixing has a future; there are just too many downsides
Mike Betts, JP Morgan
Grounds for suspicion: Why are European materials costs so different?
A glance at the table below shows enormous price differentials for basic building materials across what is supposed to be a single European market. But does this suggest that some counties鈥� industries are using anti-competitive practices to keep prices high, or is it the result of legitimate variations in production costs?
Different national standards, different conventions in naming products and the historical accidents of how industries develop in different countries mean that cross-border comparisons are notoriously difficult to compile. This is what the staff of the European Commission鈥檚 competition directorate face when they try to separate coincidence from price-fixing, and good market penetration from deliberate market carve-up.
It is also what UK contractors and quantity surveyors face when trying to make accurate cross-border price comparisons. The figures quoted below, compiled for 黑洞社区 by Davis Langdon & Everest, are drawn from its network of European offices. 鈥淚t鈥檚 difficult to ensure that we鈥檙e comparing exactly like for like,鈥� concedes associate Peter Fordham. 鈥淎nd there鈥檚 also the enormous discounting that goes on.鈥�
Cement and ready-mixed concrete suppliers attribute fluctuations in their products鈥� price and their relatively high cost in the UK to the restrictions on quarrying aggregates in this country, rather than to the existence of price-fixing cartels. Analysts have some sympathy with this view: 鈥淎ggregates are a scarce resource, so there is an economic rationale for price increases,鈥� says one.
The fact that softwood costs more than twice as much in the UK as it does in Germany can be put down partially to geography. Germany鈥檚 greater forested area means that it is closer to timber self-sufficiency than the UK, which imports 70% of its supply. Germany is also closer to the Scandinavian and Eastern European timber exporters.
However, Timber Trade Federation statistician Nick Moore says: 鈥淎lthough production costs in Germany are localised, the price differential does seem quite large.鈥� In the case of plywood, the high UK price is a reflection of the fact that no plywood at all is produced here, according to Moore.
Cartel and conspiracy theorists often point to the plasterboard market to make their case. Historically, they are justified; for instance, BPB and British Gypsum were both fined by the European Commission in 1996 after they took steps to protect their market when Spanish company Iberia tried to import a lower cost alternative. And even today, the EU competition directorate is investigating allegations of Europe-wide price-fixing between BPB, Knauf and Lafarge.
DL&E鈥檚 figures show reasonable consistency across northern Europe. 鈥淭he plasterboard companies explain it away as different sizes, different standards; but that鈥檚 fogging the issue,鈥� says one City analyst. 鈥淚t鈥檚 difficult to justify a 20% price differential on what is a basic commodity.鈥� The Spanish figure is higher, as plasterboard is used less frequently there.
Cast iron drain pipes appear to cost at least 25% more in the UK than anywhere else in Europe. The Cast Iron Drainage Development Association puts this discrepancy down to differences in discounting policy and distribution. Another factor could be the near-dominant position that Saint-Gobain-owned supplier Stanton has in this market.
